Parsing the Mixed Signals in January's Employment Report

Although the U.S. unemployment rate unexpectedly dropped to 9.7% in January from 10% in December, the mixed signals generated from the accompanying data are likely to continue through the first quarter, as large employers continue to influence job statistics based on their ability or unwillingness to hire full-time workers.The Labor Department announced Friday that the U.S. lost 20,000 jobs in January even as the unemployment rate fell -- a sign that perhaps something other than corporate job creation is going on. In fact, revised numbers showed that 1.2 million more people lost jobs since the recession began than previously thought, hardly anything to stand up and cheer about.

Additionally, the number of people unemployed for 27 weeks or longer, as well as those considered "Not in Labor Force," continued rising.

Those numbers hardly suggest job growth, but even the "positive" numbers can be viewed as suspect (Barry Ritholtz lists the pros and cons in the employment survey in his blog).

Fewer "Permanent Job Losers"

The Bureau of Labor Statistics reported that workers unemployed "due to job loss" decreased by 378,000, with most of the decline coming from the "permanent job losers" group. Also the number of "underemployed" workers -- those who want full-time work but work part-time instead -- fell from 9.2 million to 8.3 million in January.

Perhaps the most encouraging numbers came from the Household survey, which reported an increase of 541,000 workers and temporary workers. The latter category increased by 52,000. But those major moves still translated into a net loss of 20,000 jobs in January.

The reason the unemployment rate dropped but jobs decreased likely lies with employers.

"The drop in the unemployment rate was particularly surprising, as it was predicated on households reporting an increase in employment," says Diane Swonk, chief economist at Mesirow Financial. "This could be capturing the self-employed doing slightly better than they had been, but it is still puzzling."

"Close to a Tipping Point"

In a recent report on the job market, Moody's Chief Economist Mark Zandi says: "Judging by the job-creation rate, businesses are much less willing to hire than at any time since the Bureau of Labor Statistics began calculating these numbers in the early 1990s." Zandi also points out that employers are benefiting from high worker productivity driven by technology, and they're milking those productivity gains as long as possible during this slow-motion recovery.

"Hours worked and weekly earnings improved, which suggests that we are close to a tipping point on employment," says Swonk. "Employers tend to work their current employees harder and add overtime before they actually commit to new hires."

Once they make that switch, says John Challenger, chief executive of global outplacement firm Challenger, Gray & Christmas, employers generally turn part-timers into full-time workers and round out their staffs with temporary workers.

Employers have also been hiring part-time workers and independent contractors to save on payroll and health care costs, helping to boost their profits. That somewhat explains why the number of temporary workers is up, but it's harder to pinpoint where almost 1 million underemployed workers went. Unless there's a lag in workers showing up on corporate payrolls, they could easily reappear in the unemployment statistics next month, continuing the confusion.

"All of these trends are indications that the job market is starting to recover," Challenger says, but "we may not start to see steady job gains until the second half of the year." That may be about the best we can ask for at this point.